EU referendum: our thoughts as the UK decides to leave

Following the UK’s historic decision to leave the European Union (EU), we share some initial views from our economic and investment teams as to what this result may now mean for markets and investment strategy.

Nick Mustoe,Chief Investment Officer, Invesco Perpetual

After months of anticipation, UK voters have decided – in an historic move – to leave the European Union some 43 years after joining its predecessor, the European Economic Community, in 1973. The UK government, institutions and wider business community now have the task of addressing a multitude of financial, economic, fiscal and political implications and consequences.

In our view, the decision to leave will likely increase existing market volatility in the immediate aftermath, driven by investor uncertainty over the potential consequences of the outcome, and may see investors moving further into defensive assets. This type of market volatility often leads to price adjustments that are indiscriminate, and can therefore present attractive buying opportunities for fundamental, long-term investors, such as ourselves.

Market consensus appears to be clear that, over the short term, the decision to forego EU membership will likely lead to weakening of sterling and impact UK economic growth. The extent of such an impact and how long it will last can only be speculated on at this time. The more immediate impact on the UK economy and growth will likely be determined by several domestic and global factors, from trade, productivity and capital investments (domestic and direct foreign) to the direction of central bank monetary policy.

“Longer term, we believe the UK economy will not only be able to handle the decision to leave the EU, but continue to thrive…”

Longer term, we believe the UK economy will not only be able to handle the decision to leave the EU, but continue to thrive as we remain optimistic about the UK’s growth outlook. Having experienced some of the strongest growth among the G7 nations over the past four years, we believe the economy is well positioned to handle what lies ahead.

For our part, we have been investing across global equity markets for more than 30 years. And whilst markets have changed, we have always remained true to our investment principles. This event is no different. In doing so, we remain focused on what is in the best long-term interests of our clients. It is our commitment to taking a long-term view that has been the key to the investment performance that we have generated over time.

John Greenwood, Chief Economist, Invesco Ltd

Now that the voters have had their say and have opposed the establishment consensus to remain in the EU, the action will switch to the markets in the short term and the government, Parliament, and the negotiations with the EU over the terms of exit in the longer term. I expect sterling to experience an immediate fall of perhaps 10-15%, but the euro could also be adversely affected as investors assess the possible knock-on effects on the EU and the Eurozone. Most likely, the US dollar, Japanese yen and Swiss franc would be regarded by investors as preferred “safe havens”.

In the near term, the current Cameron administration is likely to undergo a significant shake-up to reflect the views of the victorious Brexit rebels. These changes could even include the departure of Prime Minister Cameron, resulting in a Conservative party leadership contest. Even so, simply changing the prime minister and members of the cabinet could prove inadequate, and the country may demand a general election. The Conservative party may end up divided, giving rise to the possibility that Labour is re-elected but opposes the result of the referendum.

Next, there is the very real problem that although the electorate has now voted for Brexit, up until the referendum Parliament was solidly in favour of remaining in the EU. Since under the British constitution it is Parliament that is sovereign, Parliament cannot be counted on to pass the necessary legislation to implement the break from the EU.

Finally there will be extended and no doubt tortuous negotiations with the EU to establish the new modus vivendi between the UK and EU member countries. These talks will need to cover trade, investment, regulation of products and services, migration, security, and a host of legal matters from human rights to the healthcare treatment of Britons in the EU and EU citizens in the UK. Each agreement will in turn require new legislation. The new administration will have its hands full.

The above is an extract from an article first published by Invesco Perpetual on 24th June 2016.

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